Afterpay's US customer numbers surge in COVID-19 lockdown

Afterpay says it has signed up 1 million active customers in the US over the past 10 weeks as consumers went online to shop during the coronavirus shutdown, and now has 5 million active customers in the world's largest economy.

The buy now, pay later firm said the influx of new US customers was a 30 to 40 per cent jump from the weekly rate of new clients it added in January and February. The news sent its stock to an intraday record high of $45.13 on Thursday morning, giving Afterpay a market valuation of more than $12 billion.

Afterpay said it processed $2.4 billion worth of merchant transactions in the US since the start of the year, a 354 per cent increase from the same period in 2019. Afterpay said it had 15 million app and site visits in April alone, and its US shop directory contributed nearly 10 million referrals to its retail partners.

Afterpay has boomed in the US as shoppers have been forced online during COVID-19 lockdowns which have threatened the future of retailers like J. Crew. Credit:AP

Andrew Mitchell, a portfolio manager with Afterpay investor Ophir Asset Management, said the numbers were better than the market had expected and backed up by news overnight from one of the company's key US retailers, Urban Outfitters.

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“They noted overnight ‘online traffic and conversion have exploded in the past six weeks with a 63 per cent jump in new online customers’,” said Mr Mitchell.

RBC analysts said Afterpay's latest trading update suggested 2020 financial year consensus forecasts "have been cut too far in recent months," but the share price showed markets have "arguably shrugged this off, reflected in valuation multiples sitting back at the top end of historical ranges."

Record highs

Afterpay's stock has been testing record highs since WeChat owner Tencent emerged with a 5 per cent stake this month, which was interpreted both as a validation of the deferred payment concept and an opportunity to use the investor as a potential partner to expand into new markets.

Analysts had already flagged Afterpay's stellar progress in the US. Citi reported this month that Afterpay's web site visits increased 208 per cent in April - compared to April 2019 - and noted "Afterpay also overtook [Commonwealth-Bank-backed rival] Klarna to have the highest app downloads in the US."

"At a time in which ecommerce has become the primary way people are shopping, there is a growing interest and demand among consumers to pay for things they want and need over time using their own money - instead of turning to expensive loans with interest, fees or revolving debt," said Afterpay co-founder Nick Molnar.

Growing confidence

The company said that on average, its merchant partners saw customer conversion rates on sales [customers paying to complete their purchases] lift by more than 20 per cent, and average order values increase more than 25 per cent compared to all other payment methods.

The Tencent investment hasn't been the only factor driving Afterpay's shares to record highs.

Investors are growing increasingly confident that the COVID-19-induced recession will not be a near-death experience for the buy now pay later sector as customers lose their jobs and their ability to buy and pay for goods using the service.

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Rival Zip reported that its business actually received a boost as customers and merchants were forced to transact online as have other players in this sector.

"The key question is whether the momentum and shift to e-commerce persist," said Citi's Siraj Ahmed in a recent report on Afterpay. "If the current trends continue, then we see upside risks to our [second half FY2020 forecasts] for GMV [gross merchant volume] forecast of $5 billion ... and active customer forecast of 9.3 million."

RBC, with a 12-month share price target of $29 for Afterpay, is more cautious.

"We feel plenty of growth is factored in at these levels, however we acknowledge the current structural tailwinds and probably won’t get a good feel for loss rates until the large government stimulus programs roll off later in the year," its analysts said.

Ophir's Mitchell also expressed some caution and said his firm will be closely watching how these trends play out longer term.

“We are keeping a keen eye on whether online will slow as bricks and mortar [shops] reopen, and what this will do to overall customer growth,” he said.